Why transfer of mining leases is stuck in deep uncertainty

Reliance may be placed on the Minerals (Other than Atomic and Hydro Carbons Energy Minerals) Concession Rules 2016 which provide a wide and inclusive definition of ‘transfer’ and state that ‘transfer’ is defined broadly enough to cover indirect transfers. Interestingly, there are various deals in the market that are hinged on this understanding.  For example, Nirma Limited proposed to buy Lafarge India’s cement assets from LafargeHolcim through an asset sale, but in light of the ambiguity around transfer of mining leases, the structure was later modified to a 100 percent share sale (based on the interpretation that a 100 percent share sale does not constitute transfer under the MMDR Act).

However, while structuring a deal involving indirect transfer of captive mining leases, parties should be wary of a recent judgement of Supreme Court in the case of State of Rajasthan and Ors. v. Gotan Lime Stone Khanji Udyog Pvt Ltd and Ors (Gotan Case) (AIR 2016 SC 510). In the Gotan Case, the Supreme Court held that no lessee can trade mining rights by adopting a device of transferring the entire shareholding only with a view to sell the mining rights for private profit. It further held that where a corporate entity is used to conceal real transaction of transfer of a mining lease for consideration without statutory consent, lifting of the corporate veil is necessary.

In the Gotan Case, the court relied on the ‘substance over form’ argument while distinguishing between a real share sale transaction and an apparent transaction structured with the intent of bypassing the transfer regime under the MMDR Act.  This could mean that a deal involving an acquisition of a company which holds a mining lease in addition to other significant assets may not fall foul of the Gotan Case test, as opposed to acquisition of a skeleton company whose only asset is a mining lease.

The judgement is still out on what would fall under the ‘transfer’ bucket in the MMDR Act and what would not. The uncertainty in the market shall remain till either the Supreme Court or the government clarifies its position with respect to indirect transfer of mining leases. Till then, deals may be structured in such a manner such that they do not come across as a transaction merely intended to transfer mining lease in avoidance of the provisions of the MMDR Act.